One of the crucial elements of trading that directly impacts the outcome of the profit is the take profit order (TP order). Even though this is important, some individuals tend to take TP orders for granted since they believe they are not necessary. In fact, this underrate has caused many investors to lose their funds. For those who are new to trading, taking profits is even more important since it becomes useful and necessary with every trade.

In this article, let's talk in detail what a take profit order is and some suggestions for the best take profit so as not to miss its potential and catch the highest point of the price line.

What is Take Profit order?

Every investor should have experienced the situation where the profit made decreases dramatically or even becomes a loss due to the reversal of market trends. What if you can always survive a trade at the market high? This is when a TP order should come into play.

A Take Profit order (commonly abbreviated as the symbol TP on the price chart) is a stop order placed when the market reaches the desired profit threshold at a specific level. In other words, TP is an order that converts a notional profit made by an investor into a real profit. Vice versa, if the market price does not reach the target value of take profit, the order will not be triggered.

In the forex market, a TP order refers to a standing order in a place where the trader has set a price limit at which the open position traders have held will be automatically closed out, so as to maximize the profits for them.

Note: ‘Take profit’ and ‘stop-loss’ are two very similar concepts. If stop loss is to control the scope of loss, then take profit is to ensure that the trader will make a profit on the trade. Currently, almost all popular trading platforms have a Take Profit order in the system such as MT4 or MT5.

Why should you set Take Profit in trading?

Any trader, experienced or novice, must be aware of the significance of taking profits when making trade or investments. In a nutshell, this is how you calculate a trade's profit. Moreover, it greatly affects a number of aspects of an investment final result.

Optimize order management

Even if you are a full-time trader, you cannot sit and watch the graph continuously 24/7, especially when there are many different trading currency pairs. Therefore, Take Profit order will help you partially automate by taking profits when the price moves to the level you predict.

Prevent FOMO 

Once a good technical analysis plan is in place, traders often lack a bit of discipline when prices suddenly reverse or or somewhat deviate from the trend that was forecast. At this time, the TP order combined with the Stop Loss will help traders keep their original plan with good profit,  as opposed to taking profits too soon after being "tricked" by the price line.

Manage Capital

Forecasting balances and estimated profits is also one of the important steps in capital management. The Take Profit order allows the trader to calculate the expected profit and also serves as a mark for upcoming entry points.

Note: Take Profit orders are best used by short-term traders interested in managing their risk. This is because they can get out of a trade as soon as their planned profit target is reached and not risk a possible future downturn in the market. Traders with a long-term strategy do not favor such orders because it cuts into their profits.

How to optimize the Take Profit order?

1. Dow Theory

The best technique to set a take profit order can vary greatly depending on the length of time the order should be held and the intended profit. With Dow theory, the most common way is to place TP at support and resistance levels when the price line is in an accumulation or distribution state. 

An actual example, if the market is trending downward, you should look for a support level and place a take profit a few pips above this level. On the contrary, you can continue to find the resistance level where the price line can recover in the short term for the next order.

2. Trendline

Another way with more opportunities but also more risk, traders can place TP orders according to the general trend of the chart. Throughout an uptrend or downtrend, the 2 trendlines of the price channel are also the support and resistance levels of that trend. Based on it, investors can determine the trend's end that offers the greatest opportunity for profit-taking.

3. Risk:Reward Ratio

Using the Risk:Reward ratio is the final advice, which appears to be underutilized but is still worth considering to take into account. For example, your order has a Stop loss of 40 pips, you expect that this order can achieve a Risk:Reward ratio of 1:2, then you will place a Take Profit order of 80 pips.

The key point is to figure out what Risk:Reward ratio you find reasonable and how much you can tolerate temporary losses. Note that if this ratio is too small, it will not produce significant earnings.

Common mistakes when setting a Take Profit order

Take Profit order is extremely important and necessary, but how to set profit taking to optimize profit is not easy. Here are some mistakes that should not be ignored when placing Take Profit:

• Placing TP at a high deviation from analysis: Placing TP too far from the forecast for any reason (feelings, news,...) will jeopardize profits. Placing too close, you will not optimize profits. Set too far, you will most likely ignore the uptrend when the price does not touch the TP level.

• Using too many technical analysis tools: Any analysis tool will be profitable if applied properly. Overlapping too many models into one analysis dilutes the big picture and overshadows the TP.

• Fixed into a single method: It sounds like a contradiction to the above but in reality, there is no fixed effective method of determining a profit taking point. Traders need to change their strategies whenever necessary.

• Change the TP order many times: Once you have placed a TP order, you let the market do the rest. Limit the removal of orders or change the take profit so that it maximizes its effectiveness.

• Not take advantage of automated trading systems: Many indicators can help you see trends in the market and judge whether a take-profit order is a good idea. Some indicators give you a scale of 0-100 and the weaker a trend is, the lower number expresses and helps you to decide.

Conclusion 

Through all the information above, hopefully investors have a broader view and note popular mistakes about Take Profit order - an indispensable tool when trading. Remember, even if you haven't been successful or satisfied with a TP order, that doesn't mean you've failed. Keep learning from experience and continuing to improve knowledge is a must to get successful TP orders in the future.

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